The Thai bank looks back at the human element of decision-making strategies for its new fund-focused index-linked note.

Krungthai Bank (KTB) has collected THB2.5 billion (US$70.9m) from a new principal-protected note tracking the Solactive Alternative Funds VT Index.

In order to have the QIS strategy perform well, which tends to rely on momentum and value investment models, you would need the market to generate consistent and stable signals - Tortrakun Satayaprasert 

Issued in September, the three-year note was the first time that the Thai bank tapped into Solactive’s fund index, compared with its past thematic, quantitative investment strategies (QIS)-focused index – such as Solactive Global Artificial Intelligence ESG Index Linked Note issued last year and Solactive Luxury Dynamic Factors 10% Daily Risk Control TR Index issued in 2021.

While the majority of principal-protected index-linked notes issued by the bank rely on algorithm-driven QIS strategies, it has “diversified its strategy to rely more on the human elements of making investment decisions,” according to Tortrakun Satayaprasert (pictured), senior vice president, product solutions and markets innovation at Krungthai Bank.

“In order to have the QIS strategy perform well, which tends to rely on momentum and value investment models, you would need the market to generate consistent and stable signals,” Satayaprasert told SRP. “It’s not good having a signal that one day says buy and the next day immediately says sell, which typically leads to underperformance of QIS strategies.”

“[For the Solactive index], the decision to make the investment is [left] to the fund managers,” he said. “It’s essentially investing indirectly into four different funds and then we add derivatives element to it [and] make the investment principal protected.”

The four funds linked to the index include the Eleva Absolute Return Europe Fund, DNCA Invest Alpha Bonds Fund, Winton Trend Fund and Helium Performance Fund. The index comprises multi-asset exposure including equities, interest rates and commodities.

The note was offered to KTB’s private wealth clients with a minimum ticket of THB3m. The return will be paid at maturity.

The bank’s latest index-linked product activity comes after its first UBS index-linked principal-protected structured note debut in July tracking the UBS X-Asset Risk-Premia Portfolio 2.0 Index, also a multi-asset index that tracks the performance of equities, interest rates and commodities. It collected THB3.3 billion in sales volume, SRP has learnt.

Satayaprasert noted that as its client base tends to invest heavily in local-named corporate bonds, and are overweight on interest rates and credit risk.

“When we design our products, we want to ensure that we improve their portfolio diversification,” he said.

Rate’s impact

KTB has issued 31 structured notes year-to-date, with 13 tied to interest rate, eight tied to FX rate, seven tied to index, and three tied to ETFs. In comparison, 40 products were issued by the Thai bank in 2022 – 17 of them were linked to interest rate, according to Satayaprasert.

In late September, the Bank of Thailand raised its key interest rate by 25 basis points to 2.5% –  reversing the country’s low-rate environment that stood at around 1.25% in November 2022.

“The Thai yield curve was very steep [in 2022], and there was a lot of value in issuing structured products on the interest rate side,” he said.

Besides UBS, other custom indices the Thai bank has issued this year include the Deutsche Bank Momentum Asset Allocator 5.5% Volatility Control Index and BNP Paribas AWR Commodity 4% VC ER Index.

Overall, year to date KTB has collected THB17 billion worth of structured notes in sales, SRP has learned.

Meanwhile, Satayaprasert highlighted the bank’s focus on various payoff structures like twin win and shark fin notes this year and is looking to develop “more sophisticated” payoffs such as autocallable for next year.

More recently, headlines around Thai tax residents with foreign-sourced income being subject to taxation in Thailand loom in investors' attention, noted Satayaprasert.

“[The uncertainty caused by the new tax rule] will likely impact investors’ decision to invest directly overseas,” he said. “I think [this will make] more people consider investing in locally-issued products with offshore exposure like structure notes or depositary receipts (DR) instead.”